Verizon’s fiber build could be an upside for Dycom and Zayo, says analyst

Verizon’s three-year, $1 billion agreement to purchase up to 12.4 million miles of fiber from Corning could provide new opportunities could for fiber construction company Dycom while motivating Zayo Group to be even more aggressive with new fiber expansions.

Jennifer Fritzsche, senior analyst for Wells Fargo, said in a research note that the build could be risky for RLECs (rural local exchange carriers), a positive to fiber “arms dealers” like Dycom, and somewhat of an unknown or more positive catalyst for fiber network owners Zayo and Crown Castle.

Dycom has not set a date to reveal its latest earnings results, but it recently cited Verizon as its fourth-largest customer, generating 10.2% of its revenue.

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In its fiscal year 2017 earnings report, Dycom said it saw an increase in revenues from Verizon. The company has already signed a number of contracts with the telco in recent years, including construction, maintenance and engineering contracts covering states in Massachusetts, New York, New Jersey, Pennsylvania and Maryland.

Having this well-established traction with Verizon signals that Dycom is in a good position to be a major construction provider on the proposed fiber build.

“Given its close relationship with VZ over the years (including working on VZ’s initial FiOS deployments), we would expect DY will capture some of this incremental VZ business,” Fritzsche said.

At the same time, Fritzsche said that the impact to other fiber-centric players like Crown Castle and Zayo is not clear, but overall could be “positive.”

While some investors are concerned that Verizon, which is a large Crown Castle customer, could do its own small cell installations, the tower and fiber provider has already won a number of multiyear contracts.

“We would note, however, that CCI already has multiyear contracts in place and, according to our checks, ~50-60% of VZ’s small cell efforts to date have already been self-performing,” Fritzsche said. “Other checks would suggest that the small cell “pie” is growing rapidly, with all 4 Big 4 carriers spending on the effort.”

Zayo, which will become the largest standalone fiber player after CenturyLink completes its Level 3 deal, also has a number of contracts for fiber and other services with Verizon in place as well.

“While incremental revenue from VZ could get tougher, we expect VZ’s push will increase the sense of urgency of others to expand fiber outside their footprint,” Fritzsche said.

However, the segment that could be challenged by Verizon’s fiber build is smaller rural ILECs that have not made wide-scale fiber network upgrades.

“If VZ is planning to overbuild a lot of these RLECs’ footprints as announced earlier this month, we suspect the RLECs will have to materially increase their network capital spend to play catchup on the network,” Fritzsche said.

A number of independent ILECs like Consolidated and Cincinnati Bell, which have both expanded their fiber networks, are in a good position to capture more broadband market share even as Verizon moves forward with its 5G wireless plans.

“We favor those RLECs that have focused capex on the pushout of fiber deeper into the networks,” Fritzsche said. “We believe CNSL and CBB have led the way from the rest of the RLEC pack in terms of speeds.”